What If Tesla Isn't a Scam?

Buddha is credited with saying, "The root of suffering is attachment."

I will tell you that as an investor, you just can't get too attached to your ideas and beliefs — or the stocks you buy. Because when you get attached, it becomes much harder to know when you're wrong. And oh boy, will that mean suffering...

However, at the same time, the successful investor has to act with conviction.

Buddha also reportedly said, "People with opinions just go around bothering each other." And it is in that spirit that I'm going to share my opini tell you something I've been thinking about since last week...

What if Tesla isn't the disaster some analysts claim it is?

I don't know how much you've followed the Tesla story. It's full of missed estimates, massive cash burns, and actual fires, along with surprise quarterly profits and blowout sales numbers.

Cult stocks are always a battleground, and Tesla is the poster child. I've avoided taking any positions in Tesla because it's too difficult to figure out what's what. Both bulls and bears lose, and who wants to work that hard anyway? Lotta fish in the sea, many of which will just jump in your boat...

Worst Quarter Ever

As I write this on July 3, Tesla is rocking 6% higher after it delivered 95,000 cars in the second quarter. Clearly, it was a good time to beat every single analyst's estimates — the stock has lost a third of its value over the last six months.

And it was just a couple months ago, after the first quarter earnings report, that Tesla was openly mocked by Wall Street. That's what happens when deliveries fall 31% and you lose $702 million in three months (and really, it was worse than that, as the company burned $1.5 billion in cash).

One analyst said it was the worst quarter by a public company he'd ever seen.

Now, Tesla hasn't reaffirmed 2019 guidance. And the company hasn't revealed where its backlog stands, either, though it says that orders outpaced deliveries in the second quarter and the backlog grew. But this quarterly performance could be extremely significant. A turning point, if you will.

Instead of burning cash, Tesla might actually add to its cash position this quarter. That's because Q2 deliveries were higher than actual production, meaning it unloaded some inventory. And the gain in backlog means it can potentially maintain this level of delivery so long as orders remain steady. And clearly this is the big question.

I don't have a dog in this fight, at least when it comes to Tesla. The company can succeed or fail and it doesn't affect me. So why am I so interested in Tesla's second quarter?

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The Rising Tide

Well, I'm glad I asked me.

Specifically, my interest is in the electric car sector. More generally, I am fascinated by the transition away from a fossil fuel economy. Argue all you want; this transition is happening. I can't tell you exactly how fast it will happen, but the fact is, demand for oil has already peaked and is now in permanent decline.

There are a few reasons for this. For one, the internal combustion engine has gotten more efficient. But the second factor is the electric car.

For at least a decade now, virtually all oil demand growth has come from emerging markets, especially China. Because that's where wages have been rising and infrastructure has been built. But because of pollution and the desire to foster a homegrown industry, China has been on a huge electric car push.

China is adding enough electric cars that it is affecting global oil demand. This trend isn't going to reverse. It is most likely to accelerate. It is the biggest investment story the world has seen in decades...

Because transitions like this aren't just about wealth creation. They're about wealth destruction, too. Saudi Arabia has been losing money hand over fist for five years. It plans to sell its crown jewel and most valuable company on earth — oil company ARAMCO — because it knows its best days are behind it.

Norway has the biggest sovereign wealth fund in the world. It was built on oil. But the fund is now selling its oil holdings.

The collapse in oil prices is a big reason Venezuela has descended into chaos. At $80 a barrel, that socialist government can pay for all its ridiculous programs. But at $50 a barrel, nobody wants Orinoco oil sands. The government can't pay for squat.

The ramifications are pretty intense. What happens to the Middle East when oil wealth is no longer a driving force? What about Russia? I think it's easy to imagine that Putin's increasing military actions of the last few years are related to oil prices.

Did you know that auto parts is the biggest supply chain in the world? What happens there as more and more electric cars hit the roads?

Now, of course, this type of transition doesn't happen overnight. Right now, the best estimates are that it will be years before the transitions starts really making an impact...

I'm not so sure. Oil demand has already peaked. And I think electric car demand is one of those things that will build in a predictable fashion until a level of critical mass is achieved, and then it just explodes.

And I think that's what Tesla's second quarter delivery surge is all about. It seems unlikely that we've hit critical mass already. Consider this the calm before the storm.

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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